Top 100 funds update: BlackRock World Mining

Analysts at investment bank Investec Securities have compiled a list of the investment trusts with the most exposure to Rio Tinto (see table), and the trust with the highest exposure is IC Top 100 Fund BlackRock World Mining Trust (BRWM), which has 10.1 per cent of its assets in RioTinto.

But BlackRock does not consider this to be a serious problem

"Although obviously disappointing, Rio's recently announced impairments are all non-cash impacts which will not affect the ongoing cash generation of the business or its ability to pay dividends," said Catherine Raw, co-manager of BlackRock World Mining Trust. "The write-downs reflect two poor investments, one of which was made in 2007 when the company acquired Alcan. The other, and what surprised the market more, related to Rio's more recent acquisition of Riversdale Mining in 2011.

"While management change can sometimes create uncertainty, in this case Sam Walsh, a long-standing Rio Tinto executive, has been promoted to chief executive officer. While there is a small amount of uncertainty, this is also an opportunity to create value under new leadership.

"Combined with Rio's recently announced $5bn cost cuts, we think this news is a sign of a move towards greater capital discipline in the mining sector; a positive we have been looking to for some time. As at end-December 2012, BRWM had a 10.1 per cent position in Rio Tinto, in contrast to the HSBC Global Mining Index which has an 8.5 per cent position."

Investment trust analysts are also not concerned that Rio Tinto's write-down will have a great impact on BlackRock World Mining trust.

"The Rio Tinto share price has not been particularly affected by this, and even though BRWM's top holdings are concentrated (they account for 53.5 per cent of assets) there is significant diversification below the top 10," says Simon Elliott, head of investment company research at Winterflood. "So we think this trust offers diversified exposure to the resources sector as it has Rio Tinto and a considerable number of others (the trust has around 75 holdings)."

That said, Winterflood's preferred commodity trust continues to be City Natural Resources High Yield (CYN) (also an IC Top 100 Fund) which has much more in mid and small caps. "We think that when commodity prices strengthen, City Natural Resources High Yield will benefit and outperform BlackRock World Mining," says Mr Elliott. "However, BRWM still has a lot of merits and its policy of looking to increase its income (read more on this in our tip) will benefit a lot of private investors. It is also run by a highly experienced, well resourced team."

BRWM beats its benchmark HSBC Global Mining Index over one, three and five years in terms of share price total return.

Broker Oriel Securities continues to rate BRWM as positive, saying it is a good fund for a specialist sector (read more on this). "We view BlackRock World Mining as a useful fund for investors who wish to outsource management of this relatively specialist and volatile sector to a team with significant expertise," said Iain Scouller, head of investment funds at Oriel Securities. "Although short-term performance has been mixed and at times slightly behind benchmark, the longer-term track record has been good."

He adds: "I assume this write-down was anticipated by the market as it has had no material impact on the share price."

Over the past week, the investment trust's share price has not experienced any severe decline, while it continues to trade at a similar level of discount to net asset value (NAV) as its 12-month average is just over 13 per cent.

"BlackRock World Mining Trust is a good way to play the commodities sector and if mining shares re-rate it will benefit," says Henry Freeman, an analyst at Investec. "The trust has been at a discount to NAV for a while, so what has happened to Rio Tinto is to some extent already accounted for in the trust's share price, and the discount could narrow when sentiment towards miners picks up."

Investment trusts with exposure to Rio Tinto

Source: Investec as at 17 January 2013